Happy Friday!
What a week. Oil opened Monday near $105 a barrel on fears the US had been attacked in the strait, collapsed nearly 10 percent by Wednesday on peace talk hopes, and is finishing the week around $94 as fighting continues despite an active ceasefire. The market has been driven entirely by headlines, and every one of them contradicted the last. The underlying supply situation has not improved, and I do not believe a peace deal, if one comes together, solves the physical problem quickly. But the market is trading on hope right now, and hope is moving prices more than fundamentals.
Monday set the tone. Iran’s state media reported two missiles struck a US warship near the entrance to the Strait of Hormuz, pushing WTI sharply higher before the US denied any ships were hit. At the same time, Trump launched what he called “Project Freedom”, an effort to guide commercial ships stranded in the Persian Gulf out through the waterway. Iran immediately responded with missile and drone attacks, striking an oil terminal at the UAE’s Fujairah port and setting it ablaze. The ceasefire that has been in place since early April is hanging by a thread. By Tuesday, the US and Iran seemed on the brink of a dangerous new phase of this war.
Then Wednesday flipped everything. A source from Pakistan said the two sides are working toward a one-page framework to end the fighting. The US expected to hear Iran’s response on key sticking points within 48 hours. This is the closest to a deal since the war started in late February. WTI dropped to around $92. Trump also quietly pulled back “Project Freedom” sending a signal the administration may be clearing the path for diplomacy.
Thursday added more fuel to the optimism: Saudi Arabia reported than an understanding had been reached to ease the naval blockade in exchange for a gradual reopening of the Strait. Israel also reported Iran agreed to transfer its stockpile of highly enriched uranium to a third country. Neither report was independently confirmed, but together they were enough to push oil prices lower.
Even with a deal in the works, the supply picture does not fix itself overnight. Even if the US and Iran sign something in the coming days, it will still take weeks for oil shipments to resume flowing out of the Persian Gulf. Ships need to move, ports need to reopen, and crews need to feel safe sailing through the strait again. The physical supply crunch does not end the moment a deal is announced. Some early signs of quiet movement are encouraging. A handful of UAE tankers were reported sailing through the strait with their location tracking systems turned off. But this is far from normal traffic.
US gasoline stockpiles are falling sharply and could reach the lowest level for this time of year in modern records by the end of August. US refiners are prioritizing diesel and jet fuel production over gasoline because margins are better, which is squeezing consumer supply even further. The EIA report this week included a 2.2M draw in crude inventories, a 2.5M draw in gasoline inventories, and a 1.3M draw in distillate inventories.
On the supply response front, US producers are finally starting to move. Diamondback Energy announced they will increase drilling, expecting as many as 30 additional rigs to be added in the Permian. This is roughly a 10 percent jump. Continental Resources and Exxon have also committed to production increases. Trump also signed a presidential permit for the Bridger Pipeline expansion that would eventually carry about 1.1 million barrels per day of Canadian crude to Wyoming. Libya’s Zawiya refinery near Tripoli was forced to shut down this week after attacks struck multiple locations inside the plant. The closure removed 120,000 barrels of crude oil per day of global supply. Adding to the supply picture, China slashed its April oil imports by roughly a quarter compared to pre-war levels, but its state-owned companies have been quietly reselling some of those cargoes to European and Asian buyers, which has helped ease some of the supply crunch overseas.
This morning’s April jobs report came in much stronger than expected. The US economy added 115,000 jobs, more than double the 55,000 analysts were forecasting. The unemployment rate held steady at 4.3 percent. The report is a reminder that even with $4.50 gasoline and a war disrupting global energy markets, the US labor market is still holding up reasonably well. Hybrid vehicle sales jumped 37 percent in the two months since the war began, which tells you how consumers are adapting. But there are real cracks showing. Consumers are starting to report cutting back on food and everyday purchases to cover fuel costs.
The Chicago spot market was a disaster this week and I need to address it directly. Gasoline and diesel prices collapsed last Friday and Monday after news broke that one major refinery was back online after a power outage and the refinery with the broken coker would return by end of May instead of June. That was great news and a sigh of relief. Then Thursday happened. A single refiner purchased every open diesel barrel in the Chicago market in one move, sending diesel prices up 60 cents as traders scrambled frantically to cover positions. Friday brought more of the same as traders continued covering barrels heading into planting season. Until the current three refineries that are in maintenance fully come back online, the Chicago market is going to be a volatile rollercoaster. Even though diesel prices pulled back at the pump recently, I expect diesel prices to climb back toward $6 a gallon unless something unexpected changes. Gasoline prices moved lower this week and I do not expect pump prices for gasoline to increase in the near-term.
Propane sold off a bit on the Iran deal news, but the drop was not substantial. Futures buying is picking up as next season’s heating contracts begin to develop. Prices firmed back up after the EIA reported another draw of over 1M barrels in propane inventories due to exports continuing at record levels. I am still not predicting prices for summer fills to go significantly lower. Next season’s heating contracts should be released near end of May or early June.
As always, if you have any questions, please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal
